Bank of China ADD, TP HK$4.20, HK$2.68 close
We like Bank of China’s (BOC) exposure to a rising US rate hike cycle via its HK subsidiary. We also like its inexpensive valuation (lowest of the big-four banks’ FY22F P/BV) and its high FY22F dividend yield (highest of big-four banks).
China Merchants Bank ADD, TP HK$84.10, HK$41.15 close
China Merchants Bank (CMB) is our top sector pick. We believe its ROE and better-than-peer net profit will be sustained, driven by its retail banking operations. We think continued rising ROE under the new president could be a re-rating catalyst.
Ping An Bank ADD, TP Rmb22.70, Rmb13.00 close
Ping An Bank (PAB) is a key beneficiary of the ongoing recovery in credit card asset quality. It could also benefit notably from any loss of market share for fintech players given a stricter fintech regulatory environment.
Deposit cost cuts: History shows little benefit
Our EPS forecasts are unchanged despite deposit rate cuts, due to political pressure to pass on the lower deposit costs to lower loan yields.
Some small and mid-size banks may face less political pressure to pass on deposit costs, with MSB, PAB, CQRCB benefitting more than peers (Fig 1).
Loan growth for big banks has overtaken smaller banks since Apr 2022 (Fig 5-6), suggesting more political pressure to support the economy in our view.
We remain sector Neutral. Sector top picks: CMB, BOC, PAB and CITIC.
Deposit rate cuts first, with lower loan yields to follow
? We do not expect any benefit to FY22F net interest margins (NIM) or EPS, even though China’s largest seven banks have cut their advertised time deposits rates by 10-15bp, and their demand deposit rates by 0.5bp.
? This is due to political pressure. We believe a key reason for the People’s Bank of China (PBOC) window guidance for banks to cut deposit rates is an expectation that these banks will pass on the lower deposit costs in the form of lower deposit yields.
? This is what happened in Apr 2022 when deposit rates were also cut, with 2Q22 NIM falling 9bp qoq and 11bp yoy for the banks we cover (Fig 3).
? In the event that some banks (possibly small and mid-size banks, and/or non-state owned) do not pass on the full amount of the deposit rate cut, then MSB, PAB and CQRCB could see FY22F net profits benefitting more than peers (Fig 1).
Big banks seem to be helping the real economy more
? Loan growth for the big four banks has overtaken smaller banks’ since Apr 2022, (Figs 5-6). This in marked contrast to pre-pandemic, where smaller banks have grown faster than big banks. We think that this indicates big banks face greater national service pressure amidst times of greater economic weakness.
? Their stronger loan growth is even more surprising, given the big banks higher 1H22 mix of consumer (including mortgage) loans (Figs 7-8) and their slow growth.
? Household consumption loan growth of 5.1% yoy in Aug 2022 was the lowest since Jun 2006’s 4.5% yoy. This was driven by household short-term consumption loans (3% yoy), with household medium to long term consumption loan growing 5.5% yoy (slowest since Sep 2006’s 5.2% yoy) (Fig 12).
Maintain sector Neutral; top picks are CMB, BOC, PAB and CITIC
? We retain our Neutral rating for China’s banking sector. We value the banks using a stress-test adjusted GGM. Upside/downside risks: better-/worse-than-expected economy and increase/decrease in policy risks.